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NIDHI LIMITED

 

What is Nidhi Company

The term “Nidhi” means a treasure. It is regulated under Section 406 of the Companies Act 2013 and Nidhi Rules 2014. Nidhi Company is referred to as one of the kinds of NBFC. But no RBI approval is required to incorporate a Nidhi company as it is the exempted category.

Its main objective is to lend and borrow money amongst its members and to cultivate the habit of savings amongst its members. Nidhi companies are mostly incorporated in the southern part of India. Nidhi Company is incorporated in a style of a public company as it must have a minimum of 7 subscribers and a minimum of 3 directors and its name end with the words “Nidhi Limited”.

 

Things needed to know before starting a nidhi limited company.

  • A Nidhi ltd. Company can be start with minimum capital of Rs. 5,00,000subjects to condition that within time period of 1 year the capital shall be Rs. 10,00,000.

  • Every Nidhi Ltd. Company shall be treated as Public Limited Company and shall have minimum 3 directors and 7 shareholders. However, the shareholder may be director and vice versa.

  • Every Nidhi ltd. Company shall have at least 200 members within a year.

  • A Nidhi Limited Company can open only 3 branches in a state and cannot operate outside the state.

  • A Nidhi Limited Company cannot issue preference shares. If already issues, such shares are to be redeemed in accordance with the terms of the issue of such shares.

  • The ratio of net owned funds to deposits cannot be more than 1:20. A Nidhi Limited Company is allowed to take the maximum of 20 times the net owned fund. Net owned fund means the total fund invested by the owner less any accumulated loss. For example, if you have invested Rs.1 crore, then you are entitled to raise funds up to Rs.20 Crore.

  • Unencumbered term deposits of not less than 10% of the outstanding deposits as specified in Rule 14.

  • A Nidhi Limited Company can open up to 3 branches after three years of continuous profit running of the business. Further, these three branches can be opened within the district only. Further, to open any branch outside the district, you will require the Regional Director (RD) permission. Also, a Nidhi Limited Company cannot open a branch outside the state.

  • Nidhi Limited Companies are not authorized to promote its activities through any kind of advertisement. This is done because the main object of Nidhi is to promote the habit of thrift and saving habits among its member and not to solicit deposits through promotions to non-members.

  • Similarly, Nidhi Company is not authorized to remit any kind of brokerage or incentive for promotion or mobilization of deposits to members or granting loans.

  • Nidhi Limited Company cannot purchase securities/shares of other organizations or institutions.

 
Advantages of a Nidhi Company
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1.  Existence of the company :

Nidhi Companies are all separate legal entities which exist on their own.  It is a recognised legal firm whose existence and function does not change with any unfortunate event taking place in the interior space of the Nidhi Company. For example, if one of the shareholders of the Nidhi Company dies untimely, then the functioning of the Nidhi Company does not collapse. A Nidhi Company can only cease to exist when it is properly dissolved by a legal process which are according to the provisions of law.

 

2.  Individual Entity :

The registration of a Nidhi Company offers it a separate Identity and not just the identity related to its directors or shareholders. In simple terms, apart from a Nidhi Company’s shareholders, it in itself holds a legal identify. This ensures that a Nidhi Company can own any kind of property in its own name legally which is a great advantage.

 

3.  Management :

The management of a Nidhi Company is comparatively easier than other companies. To introduce a change in the system of other business structures like public limited companies or private limited, it takes a tiresome long process with a lot of formalities. But this is not true for Nidhi Companies. After filling out an application for the MCA ( Ministry of Corporate Affairs) explaining the changes in the internal management of the Nidhi Company that you want, the changes would be approved and introduced almost immediately.

 

4.  Market Value :

A Nidhi Company is considered to be more trustworthy than any of the other legal money lending companies available in the market. As the functioning and the internal management of the Nidhi Company is majorly in control of the Central Government. They look after all its affairs, functions and roles which is the reason other business entities are not preferred over Nidhi Companies by the people.

 

5.  Loans at lower rates :

The primary objective and function of a Nidhi Company is to provide loans to its members in an easier way without much formalities and time consumption. The loans provided by the Nidhi Company to its members is given out at a much lower interest rate than the loans which are provided in the market. This helps in saving up money of the loan seekers.

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Disadvantages of a Nidhi Company
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1.  RBI Vigilance :

There are no essential compliances imposed upon the Nidhi Companies by the central government or the Reserve Bank of India. However, the internal activities of the Nidhi companies are governed and kept under surveillance by the Reserve Bank Of India. The deposit acceptance functions of the bank are particularly kept in check by the RBI from time to time.

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2.  Low Credit :

In all the Nidhi companies, a major drawback is that there is a limited credit available only. The whole idea behind a Nidhi Company is to provide loans in a smooth way to its members on lower interest rates but this is defeated when a hindrance like limited credit availability comes into the way of the operations of a Nidhi Company.

 

3.  Fund Raising Issues :

A Nidhi Company only accepts cash deposits from its active members. This is the amount which is available for lending loans to the shareholders. As there is a limited number of members present in a Nidhi Company, the amount of funds available for lending loans also drops. This means that lesser the number of members in a Nidhi Company, lower is the availability of funds.

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Deposits under Nidhi Company

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This is perhaps the most important feature of Nidhi Company that keeps its difference from the other type of finance companies. A Nidhi Company is allowed to accept deposits and that too twenty times the net owned fund.

E.g., If you have invested Rs.10 lakh into the company, then you could accept deposits up to a Rs.2 crore. Here are following the type of deposits which can be accepted by Nidhi Company:

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  • Fixed Deposits (FD): This is one of the best ways to raise the fund under Nidhi Company in India. Nidhi Company can accept deposits from members only and there is no upper limit on a single deposit. Further, a Nidhi company can offer interest up to 12.50% on FD per annum. The maximum tenure up to which a Nidhi Company can accept FD is 5 years.
     

  • Recurring Deposits (RD): Recurring deposits can also be accepted by the Nidhi Company and it can offer 12.50% on the same. RD can be accepted for a minimum period of 6 months and for a maximum period of 5 years.
     

  • Saving account: A Nidhi Company can also open a saving account and can offer interest up to 6% on saving the account. However, a maximum balance cannot be more than Rs.1 lakh any point in time.
     

  • Current account: A Nidhi Company cannot open a current account for any of its members.

 

Documents Required for NIDHI Company Registration

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Given below is a list of documents one requires for Nidhi company registration:

  • Passport-sized photographs

  • No Objection Certificate (NOC) (signed by the landlord/owner)

  • Digital Signature (DSC)

  • Director Identification Number (DIN) of directors

  • Memorandum of Association of the company (MoA)

  • Articles of Association of the company (AoA)

  • PAN card: This is necessary for the filing of the financial transactions made by the company. PAN card is also necessary for the taxation process of the company

  • Address Proof

    1. Bank Statement

    2. Driving License

    3. Residence Card

    4. Any other Government issued identity proof having the address

  • Residential Proof

    1. Mobile Bill

    2. Telephone Bill

    3. Electricity Bill

    4. Bank Statement

  • Passport: Passports are only compulsory for the companies whose director is a foreign national. Passport is not a mandatory document for Indian directors of Nidhi companies

  • Registered Office Proof: Registered office proof for Nidhi company registration because of the importance of the same in the issue of government supported schemes and loans

 

It is important to note that Nidhi company registration application can be filled out online. Once the Nidhi company registration fee is fully paid, the registration form is submitted and sent for further processes of approval. Once submitted the Nidhi Company registration process is completed.

 

Process of Forming a Nidhi Company

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The following process has to be adhered for forming a Nidhi Company:

  • Obtaining the Digital Signature Certificate and Director Identification Number

First and foremost, the applicant must apply for a digital signature certificate (DSC). Through the DSC, signatures can be provided in the digital format. After securing the DSC, the applicant has to apply for the Director Identification Number.

  • Name Approval

In the next step, the applicant has to make an application for name approval to the MCA. During this process, the applicant has to provide three unique names for the Nidhi entity. The names provided must be unique and should not be against any provisions relating to intellectual property rights in India.

  • Drafting the Memorandum of Association and Articles of Association 

After the above step, the applicant must file prescribed documents to the registrar of companies. These documents must be filed through Form-INC 32. Along with this the MOA and AOA must be submitted. When submitting documents, the applicant has to intimate the main objects of forming this entity.

  • Incorporation Certificate

After reviewing the above documents, the Company will secure the certificate of incorporation. This certificate of incorporation is a testament about the company incorporation process. This will be usually be issued by the registrar within 16 to 20 business days.

  • Applying for PAN and TAN

After securing the certificate of incorporation, the Nidhi Company should apply for PAN and TAN. The TAN can be secured from the respective Income Tax Department.

  • Opening Bank Account

This is the final step in incorporating the business. It is crucial to open a bank account on behalf of the business for any transactions.

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Compliances for a Nidhi Company

After incorporating this form of entity, there are different compliances which have to be adhered. The following compliances have to be adhered by the applicant:

  • Form NDH-2 – Requesting Extension to meet the target of 200 members.

  • Form NDH-1-  The list of members has to be submitted within 90 days of incorporation. All requirements have to be complied with.

  • Form NDH-3 – Half Yearly requirements have to also been filed along with Form NDH-1.

  • Annual Returns- Annual Returns have to be submitted as per the requirements of the Registrar of Companies.

  • Profit and Loss Statement and Balance Sheet Requirements- These documents have to be submitted as per the requirements of the company on an annual basis. This must be done through Form AOC-4.

  • Income Tax Returns- Every Nidhi Company is required to file income tax returns as per the requirements of the Income Tax Act.

  • Net Owned Fund- A Nidhi Company must have a Net Owned Fund which is more than Rs 10 lakhs. The ratio of return on the Net Owned Fund must be in the ratio of 1: 20 basis.

  • Unencumbered Deposits- Any form of unencumbered deposits must exceed the requirement of outstanding deposits.

  •  Rate of Interest:

1. The rate of interest to be charged on any loan given by a Nidhishall not exceed 7.5% above the highest rate of interest offered on deposits by Nidhi and shall be calculated on reducing balance method.

2. The maximum interest on savings account shall not exceed 2% above of what is being by the nationalized banks.

3. The rate of interest being offered on fixed and recurring deposits shall not exceed the rate of interest prescribed by the Reserve Bank of India which the Non-Banking Financial Companies can pay on their public deposits.

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To know more about Nidhi Company read our blog on Nidhi Company Comparism 


DISCLAIMER-These materials are public information and have been prepared solely for educational purposes. These materials reflect only the personal views of the author and are not individual legal advice.

It is understood that each case is fact specific and that the appropriate solution in any case will vary. Finally, the owner will not be accountable for any loses injuries or damages from the exposures or usage of this information.

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